News

The brewing industry

The world's four biggest brewers –
Belgium based Anheuser-Busch InBev (AB-InBev) London based
SABMiller, the Dutch brewer Heineken, and Denmark's Carlsberg - now
account for over half the global market for beer.

Brewing Market Shares Chart

AB-InBev (owner of Budweiser, the world’s
biggest selling beer brand, Becks and Stella Artios) had beer
volumes of around 400 m hectolitres in 2010, well ahead of
Miller-brewer SABMiller (responsible for the Miller and Foster’s
brands) at just under 250 million. Third placed Heineken, which
produces Amstel, Scottish and Newcastle beers, Moretti and Tiger,
sold just over 200 million hl.

Back in 2000, the top 10 brewers
accounted for fewer than 40% of global beer sales. By 2012, and
following a decade of intense cross-border merger activity, the top
ten accounted for nearly 60%. Globally, and across the EU (including
the UK) the market for beer has become increasingly concentrated.
The brewing market today has evolved through mergers rather than
through organic growth – with all top 10 companies the product of
previous merger activity, including the world’s number one producer,
AB-InBev. AB-InBev is the result of the merger of US brewers AB and
Brazilian based brewers In-Bev in 2008. In-Bev itself was the result
of a previous merger of AmBev and Interbrew. By 2010 AB-InBev
managed over 200 separate beer brands, and had a global turnover of
$39bn (2010). AB-InBev is the dominant brewer in many global
markets. As early as 2000, when Interbrew bought Bass brewers, it
became the UK’s largest brewer (with a market share of 35% (Source:
OFT.)

Merger activity has accelerated
hand-in-hand with globalisation, driven by the search for increased
economies of scale and larger markets. While demand for beer in the
UK and Europe has remained fairly static, demand in China and the
rest of Asia has accelerated. For example, during 2011, sales of
beer by volume by AB-InBev grew by just 0.4% in Western Europe
compared with an 11% growth in beer volumes in China. In contrast,
sales by volume to Easter Europe actually fell by around 5%. The
preferred marketing strategy is to focus on non-price competition
and developing premium brands which command a higher price.
Globally, this means targeting the growing middle classes in China
and India who prepared to spend a little bit more on premium brands.

The increasingly concentrated beer market has
been the subject of continuous investigation by the EU Commission, along
with national regulators, fearful of the spread of anti-competitive
practices. For example, during the 1990s, a complex cartel of four
breweries operated in at least one country (Netherlands) and was able to
fix the price of beer and hence reduce competition.

Competition watchdogs have also been involved in
investigations involving the extent to which brewers control
competition by owning the outlets (pubs) – the so-called ‘beer tie’
- and hence can restrict choice and keep prices high. Brewing tends
to be drawn towards vertical integration, especially forwards
vertical integration, where brewers own and control the pub outlets.
Once the outlet is owned it can be controlled, with prices fixed by
the brewer. This also has the effect of creating a barrier to rival
brewers who may be denied access to the outlet. All the more
incentive for brewers to integrate even more to deny other brewers
access to markets. All of this can reduce choice and increase price.
In the UK these concerns led the 1989
Beer Orders legislation which brought limits to
the number of pubs the national brewers could own – capped at 2000 pubs.
While this opened up the market to a new crop of pub retailers,
including JD Weatherspoon, it also forced brewers to develop new markets
and focus on their ‘off-trade’ business, including supermarkets. In
addition, it created opportunities for independent brewers to enter the
market to compete with the major brewers for sales to the emerging
pub-chains, including the UK’s two largest chains, Punch Taverns and
Enterprise Inns.

Brewers been forced to sell-off some of their
pubs as a condition of being allowed to merge, hence enabling new firms
to enter the market. For example, in 2000 the UK’s Competition
Commission forced Interbrew to dispose of some 75% of its pubs.

However, in the UK around 50% of pubs are
still tied to major brewers for their supply and, according to research
by CAMRA,
the ‘beer ties’ adds around 6-7% to pub prices.

Across Europe, beer prices vary considerably.
A pint of beer in Porto, Portugal, could cost as little as £1.25, and in
Bergen Norway a similar pint could cost as much as £7. These
differences are due in part to cost variations, together with the
ability of the brewers to price discriminate. Price discrimination is
seen as an effective profit maximising strategy whenever certain
necessary conditions are met. These include the ability to identify the
sub-markets and keep them separate. Central to the success of such a
policy is the need for each sub-market to exhibit different price
elasticities of demand. Crucially, however, the existence of
discrimination implies that the seller has considerable monopoly power,
and this is what has worried competition authorities. When investigated
by the UK’s Competition Commission in 2000, it was found that brewers
were able to price discriminate between different types of customer,
with observed price differences being only partly explained by
differences in costs incurred. The Commission suggested that further
merger activity would increase the brewer’s ability to price
discriminate, and control the level of competition in the market.

In 2009, CAMRA submitted a super-complaint to
the
Office of Fair Trading ('OFT') regarding the UK ‘beer ties’ issue.
The OFT rejected the complaint, arguing that it had not found evidence
of any competition problems having a significant impact on consumers. In
contrast, it argued that at a national, regional and local level, there
was evidence of a large number of competing pub outlets owned by
different operators, who were competitive and offered sufficient choice,
arguing that large pub companies source from a number of suppliers.
Critics argue that, despite the reduction in the power of large brewers,
the competition authorities have failed to recognise the continuing
significance of the ‘beer tie’ to pricing, competition and choice.

Following this investigation the industry
modified its framework code which was designed to act
as a voluntary code
to encourage brewers and pub owners to ‘loosen’ the beer tie, and
improve the
competitive environment.